On April 16, 2020, FERC denied rehearing of an April 2019 order approving changes to PJM Interconnection, L.L.C.’s (“PJM”) Variable Resource Requirement (“VRR”) demand curve in connection with PJM’s 2019 Base Residual Auction for the 2022/2023 Delivery Year (see April 24, 2019 edition of the WER for more background on the April 2019 order and the PJM’s VRR curve). Among other issues, FERC’s April 2020 order on rehearing rejected arguments that PJM erred in designating a combustion turbine (“CT”) power plant with a new H-class turbine configuration as the Reference Resource—a theoretical new generator that PJM uses as a benchmark to determine the cost of entering the market. In a lengthy dissent, Commissioner Richard Glick argued FERC’s decision is unsupported by substantial evidence and inconsistent with FERC precedent. According to Commissioner Glick, FERC’s approval of a CT Reference Resource and resulting Net Cost of New Entry (“CONE”) estimate will lead to host of issues, including distorting PJM’s entire capacity market design and harming consumers by increasing rates.
PJM proposed its latest revisions to the VRR curve for the 2022/2023 Delivery Year in October 2018. FERC accepted those revisions in its April 2019 order, including PJM’s proposal to designate as the Reference Resource a CT plant with a new H-class turbine configuration, rather than adopting the recommendation of its independent consultant to use a combined cycle (“CC”) plant. PSEG, PJM Power Providers Group (“P3”), and various public interest entities requested rehearing of FERC’s April 2019 order. The public interest entities in particular argued that it was unreasonable to approve a CT Reference Resource because the record evidence showed the costs of the proposed CT were much higher than the cost of actually entering the market. The public interest entities also argued that FERC failed to follow its established framework for determining the appropriate Reference Resource, a three-factor test previously used to examine ISO New England, Inc.’s (“ISO-NE”) VRR curve that analyzes:
- whether the plant is likely to be developed in the region;
- whether the cost and revenue estimates for that plant can be developed with confidence; and
- whether the resulting curve produces prices high enough to meet the reliability standard but not so high as to add unnecessary costs.
In addition, P3 and PSEG argued that FERC erred in accepting PJM’s proposed change to the H-class technology. P3 and PSEG argued that no stand-alone CT plants using the H-class turbine have been built or are planned in PJM, and that FERC’s acceptance of the H-class technology was therefore inconsistent with the actual development in peaking plants in PJM.
FERC’s April 2020 order denied rehearing and affirmed its earlier determination to accept the CT Reference Resource. FERC reasoned that unlike the ISO-NE Tariff, PJM’s Tariff is not prescriptive as to how to choose the Reference Resource. But even when evaluated according to the ISO-NE framework, FERC concluded that PJM’s selection of a CT Reference Resource was supported by substantial evidence. FERC pointed to evidence that two new CT plants have been added in PJM since 2014, and argued that although CC plant construction exceeded CT construction since 2014, the Reference Resource need not be the most frequent entrant into the PJM capacity auctions. In addition, FERC found that PJM outlined reasonable concerns as to the risk of mis-estimating energy market revenues for a CC plant, and pointed to its independent consultant’s report showing that switching to a CC-based Net CONE would entail specific reliability risks. Regarding the switch to H-class technology, FERC concluded that to the extent CTs continue to be developed, it was reasonable for PJM to conclude they may be deployed with H-class technology given that it is less expensive and more efficient.
In a separate statement, Commissioner Glick claimed that FERC failed to address the public interest entities’ arguments that it is unjust and unreasonable to approve a Reference Resource whose net costs are not representative of the resources actually entering the PJM market. Commissioner Glick also took issue with FERC’s application of the three-prong test, arguing that FERC failed to:
- adequately address arguments that the proposed CT Reference Resource is unlikely to be developed in PJM;
- adequately address arguments that energy and ancillary services revenues for a CC Reference Resource could be estimated based on actual performance data; and
- address the third prong of the test by weighing whether a CT Reference Resource will lead to prices high enough to meet reliability standards without imposing unnecessary costs.
Commissioner Glick noted that “new resources (overwhelmingly CCs) are entering the market at less than half of PJM’s current Net CONE estimate and will likely continue to do so at a fraction of the revised CT-based net CONE.” According to Commissioner Glick, FERC’s approval of a CT Reference Resource and resulting Net CONE estimate will distort PJM’s entire capacity market design; perpetuate PJM’s over-procurement of capacity resources; harm consumers by increasing rates; impair reliability by dulling the price signals in PJM’s energy and ancillary services markets; and increase potential for market power abuse.
FERC’s April 2020 order, including Commissioner Glick’s dissent, is available here.